Many have already heard about what a financial safety cushion is, and some have already saved up for it.
In the field of personal finance, there is still debate about what the airbag consists of (the unit of measurement is in income or expenses) and how many parts should be in it (1,3, 6 or 12 months).
But let's first talk about what a financial safety cushion is. Many say that it is needed and few fully understand why.
A financial safety net is your savings, which will “finance” your life for a certain amount of time, even if you will not have the usual level of income during this period.
A pillow is needed not only to support you in case of losing your job or God forbid a long sick leave but also if you decide to get an education or change your field of activity, taking a short break between your previous job and a new one.
A financial safety net also protects you against major unexpected expenses, such as forced relocation or repairing the damage. But that's not all.
This is what will bring you peace of mind and give you the opportunity to choose the job you need, the rhythm of life you need. No airbag - the choice is narrower. After all, the topic of money is one of the main ones, since even food in our world is purchased for money.
The financial safety cushion, although not a fund for financial freedom, can help you get through any financial difficulties with your head held high, but not only difficulties. One of our co-founders, at one time, thanks to the accumulated airbag, managed to get a new higher education and change profession, while not working for a significant time.
In any case, a financial safety cushion will help you to easily get through any period of your financial life, without sagging under life's difficulties, which is the most important thing in any financial situation.
Why does everyone talk so much about the financial cushion? Because it is the foundation of your financial well-being. There is no point in saving up money in order to invest in some financial instruments if you do not have a base in the form of a financial safety cushion. Indeed, if something happens, you will have to withdraw this money urgently from a brokerage or other accounts, and this may be unprofitable for you.
With the need for a financial cushion, everything is clear, it’s like the ability to count, without it, nowhere. Let's now figure out what a financial safety cushion should be.
How to save, in income or expense
There is a debate about what the financial safety cushion should be. Someone says that it is measured in your monthly income, and someone says that it should be measured in expenses. Most of our future students, according to our surveys, how much they earn, spend so much, and therefore at the starting stage it does not matter if you save income or expenses.
In theory, you need to set aside your expenses, including payments on loans or credit cards, if you have any. Because the financial safety net should cover your regular expenses while you change jobs or look for a new source of income.
The same applies to aspiring entrepreneurs. They also need a financial safety cushion, despite the fact that at the start-up stage, entrepreneurs' income is irregular and spasmodic. It will be better, of course, to save in monthly income, but the expenses will suit you well.
What size should a financial airbag be in months?
It is believed that, ideally, there should be a year of your spending in order for the financial safety cushion to become truly safe. But we are also close to the theory that from 3 to 6 monthly expenses on your account will ensure your peace of mind for a long time. 3 or 6 - you decide - it all depends on your specific situation, on your current profession, place of work, level of current income and field of activity.
We think so - you should go gradually, first, you will have 1 month of expenses on your account, then 2,3 and 6. After you have provided yourself with a financial cushion, you can start thinking about investing.
How it helps in investing
In investing, such a concept as “money management” plays an essential role. Do not rush to invest if you have not mastered "money management" in your personal or family finances. The art of managing money begins with your habit of saving and saving money.
These habits will come in handy in investing because investing itself is not only the art of finding the right financial instrument but the art of managing your money. This is the choice of how much money you invest in high-risk assets, and how much you keep in your portfolio in low-risk ones. This is the right choice of a risk hedging instrument and much more.
When we are asked where to start investing - we answer that with a financial safety cushion. This step will be the first step to your wellbeing.
Posted Using LeoFinance Beta
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